Commodities

Companies

Now, I want to talk to you about the bigger picture, the really, really big picture. This is the commodity super cycle going back 200 years. A couple of things are interesting. One is that if you average out the commodity cycles, they average about 21 years.

But, like human individuals, some live to be 100, others die at 60. Here you can see that the shortest bull market was 12. You had a few that were 14, 15, one at 21 and then a very, very long one at 42. We’re 10 years on.

I think it’s safe to say that with the industrialization of the BRIC countries, you’re talking about half of the world population going from now $2,000 to $3,000 in GDP per year going to $6,000, $8,000 to $10,000, I think you’re looking certainly a minimum at five to 10 years. So, I feel pretty good.

But why are commodity prices a little soft? Every single one of these bull markets has had a mid-cycle correction. I think we’re in a mid-cycle correction. You see it in the iron ore market. You’re going to see it in all of the commodities. We haven’t seen it in gold and I think the only reason is because of the central banks.

I was fully expecting gold to be lower this summer, but it didn’t happen. Central banks came and bought 156 tonnes of gold between May and July; otherwise, I think we would have seen lower prices. But we are in a mid-cycle correction and [let’s look at] the Dow Jones Gold Industrial Average.

At the top of every single commodity bull market we’ve ended up with a ratio of the Dow to gold approximately 1:1. So it was in 1980 when the gold price was $800 and the Dow was $800 and so it was in 1933-’34 when the gold was $35 and the Dow went down to $37. So, now we’ve gone from 42:1. In 2000 it took 42 ounces of gold to buy one unit of the Dow; now we’re down at 8:1. So, people look at it and says, “But it’s over.” It sure isn’t over. Think about it.

To go from 42:1 to 8:1, the gold price has gone from $250 to $1,650. If I’m right on the 1:1, the gold price has got to go to $13,000 which means it’s got to go eight times more than what it’s already done over the next 10 years.

Now, which one do you like best, the last 10 years or the next 10 years? And not only that, but why would we have a gold price that is so high? Well, I was reading in the Financial Times last week that the European Central Banks have now created a new monitoring instrument. It’s called OMT, the outright monitoring transaction, which in effect they can buy now in the secondary market the debt of Spain and all of the flunky countries and monetize it.

Well, you know what I call it? OMG, okay? And it stands for, yes, “Oh My God,” but it stands “On Your Mark, Gold” because you’re going to go because the Q3 in the United States is coming over. In Japan they’re going to also have to print money because they’re over 200% debt to GDP. How are they going to get out of it? Printing money. And that, in the end, is what’s going to make the difference for gold and that’s why I believe at the end of the day are we going to see one-to-one? I don’t know. Two-to-one? I would bet a lot of money on that one.